Investment Watch

The future is not what it used to be

The world is changing so rapidly that investors also have to adapt their thinking. Some of the assumptions made in the past must be revisited.

Over the last five years, the MSCI Emerging Markets Index is basically flat in dollar terms. This has been a very poor return when compared against the developed market MSCI World Index that has showed annualised gains of 10.5%.

Many investors also believe that these markets will struggle over the next few years due to policies promoted by US president Donald Trump. His protectionist stance has many concerned that business will be taken away from these countries, while US fiscal stimulus will force up interest rates and draw away capital.

Many investors are also negative on the risks in emerging markets, particularly political uncertainty, and volatility. Poor corporate governance is another reason not to direct money to these markets.

However, it is worth asking whether this is all short-term noise. Over the next decade or two, where are investors most likely to see the better returns?

Speaking at an Old Mutual thought leadership discussion on emerging markets, the joint boutique head of Old Mutual Global Emerging Markets, Siboniso Nxumalo, said that the long-term fundamentals haven't changed.

“Structurally, growth is in your favour in emerging markets,” he argued. “We are going to continue to see more demand for goods and services in these countries.”

The sheer size of their populations and the growing wealth in these countries should be compared to the shrinking populations in most of the developed world. There should be a premium attached to that.

The future has changed

Private equity emerging markets investor, Vusi Thembekwayo, suggested that the world is changing so rapidly that investors also have to adapt their thinking. Some of the assumptions made in the past have to be revisited.

“You have to look beyond the news and information you read on a daily basis,” he said. “Take Nigeria, for instance. The decline in the oil price and the poor health of president Muhammadu Buhari mean that the Niger Delta is again under threat and Boko Haram will probably strengthen.

“But you can't argue with a country that has a population of over 150 million,” Thembekwayo said. “That is three times the population of South Africa. If they achieve the same rate of growth in the middle class as we have here, then the opportunity is definitely to the upside.”

Thembekwayo said that the relative success of Shoprite and Pick n Pay tells a story in this regard. For many years, Pick n Pay was South Africa's premier food retailer with a dominant market share. However, over the last two decades, Shoprite has completely surpassed it in terms of revenue, market capitalisation and market share.

This, Thembekwayo believes, is because the company's management had the ability to see through some heavy short-term noise to see the market opportunity in under-served areas.

“South Africa between 1990 and 1994 was in a difficult place politically,” he said. “At the time, there was burning of shops and other infrastructure. So if you were managing a retailer, you probably wouldn't have been thinking of opening stores in townships. But Shoprite did.

“In 1993, their largest store by revenue was in Goodwood in Cape Town,” Thembekwayo explained. “Last year, it was in Thohoyandou in Limpopo. They had the ability to see through the noise and the fog of war, and that's what is needed when you take a long-term view in complex environments.”

What about Trump?

Nxumalo added that even the Trump threat to emerging markets needs to be put in context.

“The world has changed,” he said. “The biggest companies in the S&P 500 in the 1960s were largely manufacturing based – the likes of General Motors, US Steel and Ford. Today, it's Apple, Microsoft and Amazon.”

US manufacturing in terms of its share of GDP and a percentage of employment has been in decline since the 1950s. Trump is therefore fighting a 60 year trend if he truly intends creating more manufacturing jobs.

The long-term emerging market story therefore remains intact.

“It doesn't matter which part of the world you go to, all economies grow and will continue to grow,” Thembekwayao said. “But the rate you will experience in emerging markets will surpass the rate you will see in many developed economies. What will be difficult is finding the nodes that are growing, paying the right price, and exiting at the right time. But those who can see through the noise will see the upside.”